Aviva seals £3.75m Direct Line deal, but jobs at risk in cost-cutting drive

Aviva said it had struck a deal to buy troubled insurance rival Direct Line for £3.75bn after intensive talks over the weekend but warned it would be looking for cost savings via job cuts.

The offer values each Direct Line Share at 275p a premium of 73.3% to the closing Price of 158.7p on November 27. Under the terms of the deal, shareholders will receive 0.2867 Aviva shares, along with 129.7p in cash and a dividend of up to 5p a share.

Aviva plans to achieve annual pre-tax cost savings of at least £125m through an unspecified number of job cuts, “economies of scale and increased efficiency”.

It identified “duplicative back and middle office IT platforms, as well as rationalisation of supporting teams and the reduction of overlapping roles in a number of shared service, head office and senior management functions”.

“In order to realise these cost synergy benefits, one-off integration costs of approximately £250m are expected to be incurred, of which approximately 75% are expected within the first two years post-completion,” the two companies said in a joint statement on Monday.

Direct Line's board told shareholders that it would support a sweetened £3.6bn offer after rejecting an earlier £3.3bn approach. The company, which also owns Churchill and Green Flag, fended off a bid Belgian rival Ageas earlier this year and announced £100m of cost cuts and axed 550 jobs.

After completion of the proposed deal, Direct Line shareholders will own 12.5% of the enlarged group, making it the UK's second largest car insurer behind Admiral.

"This deal strikes a balance that seems to deliver value for both parties. Direct Line has been navigating choppy waters, with its market share steadily eroding and a history of missteps from previous management leaving the ship off course," said Hargreaves Lansdown analyst Matt Britzman.

"While the new management team has been working to steady the vessel, even they couldn’t deny that Aviva’s offer was the golden ticket they’d struggle to replicate on their own. Though they’ve expressed confidence in their independent strategy, this proposal was simply too compelling to pass up."

"For Aviva, the price tag is sitting on the edge of what might be considered a bargain, but the strategic potential could prove to be a real cracker. Acquiring Direct Line cements Aviva’s status as the heavyweight champion in the UK home and motor insurance markets."

Reporting by Frank Prenesti for Sharecast.com